The UK film industry allowed itself a small sigh of relief in July when the Government published its long-awaited consultation document on the reform of film tax incentives. After 16 months reeling from the effect of a succession of tax relief clampdowns that had, according to one source, left some LA producers convinced that there were "no tax breaks at all" for filmmaking - and by extension commercial making - in the UK, the industry is now well into a three-month consultation period.

With the situation poised for resolution - and bear in mind there will be a further delay before any reforms are crystallized in the Finance Act 2006 - there's an understandable cross-industry reluctance to comment. But there is cautious optimism among the facility shops and post-production outfits, which have taken the brunt of the film production slowdown, that greater clarity will boost investor confidence.

The trickle-down effect began in February 2004. That's when the Inland Revenue amended legislation known as section 48 to close a loophole that wasn't specific to the film industry, but allowed people to exploit tax breaks by forming trading partnerships that could claim relief on productions that weren't necessarily British. More than 20 'active' projects were cancelled in the wake of a change that made no transitional allowances.

In December 2004, the UK Chancellor Gordon Brown announced further reforms to film tax rules, including an immediate end to the practice of claiming relief on both section 48 and section 42 - the specific tax mechanism for big-budget British film production. He also promised a wholesale review of the entire system for the film industry, this time to include transitional arrangements, a process interrupted by the General Election that finally resulted in the publication of July's document.

Tina McFarling, head of industry relations at the Government-backed UK Film Council, points out that the 2004 reforms simply took the legislation "back to the position of its original intent". She says the Government "has always been clear about signaling its desire to support British filmmaking talent". But she agrees that for the international filmmaker, the perceived disadvantage of a reduced tax-break compounded by a weak dollar has been disconcerting. She expects producers to use the consultation period to push for "tweaks" to the proposed mechanism for inward investment in international film.

"It is a pretty complex picture at the moment," she says. "One problem is that there are two dimensions to the British film industry - indigenous production and facilitating foreign films - and they get placed in one basket." Her view - shared by many in the supply chain - is that if the revised system provides a more streamlined tax framework for them both, it can only be a good thing industrywide.

"The uncertainty is doing the real damage, rather than any legislative changes," suggests Mike Kelt, managing director at SFX house Artem, one of the contributors to the consultation document. Kelt says the document is a "step in the right direction".

It makes the Government's preferred option - the replacement of existing reliefs with a new model that targets producers so that they, rather than any third parties, get the full benefits - clear. "The new tax relief would be restricted to expenditure that is incurred on filming activity within the UK," says the document. "This would provide a direct incentive for both indigenous and overseas film producers to make full use of the production infrastructure in the UK, thereby ensuring the stable investment necessary for the sustainable production of culturally British films."

It might be oblique, but this reference to the infrastructure is also an acknowledgement that while the Government is primarily concerned with the development of British film talent, that talent can only thrive - and be available to all industry sectors, including commercial production - if it is treated as a prime resource by the international film community.

Kelt is confident that tax uncertainties have contributed to a difficult climate for infrastructure players, although he says they aren't the only cause. "The exchange rate hasn't helped either, although that's improving. And there's also the cyclical nature of the business. Producers have more product on the shelves in LA so they don't need to make so many films."

But the London production scene has taken a hit. The closure of Henson's Creature Shop's London workshop with more than 20 redundancies this summer was a high-profile indicator. "The reduction in project turnover has had a huge knock-on effect," says Kelt. "Big companies run out of big projects so they go after smaller ones and the smaller companies get wiped out. There are a lot of companies that aren't about to fold, but they're seriously thinking about how long the situation will last."

He says the London post scene has achieved "incredible" things in the last 10 years. With no Government investment directly targeting the production infrastructure, foreign - and that usually means US - projects provide vital revenues. "It would be terrible to think that because US money dried up, all that innovation would go."

There is an upside, though, in the way the UK industry has rallied itself. McFarling says the UK Film Council "takes its hat off" to the facilitators and post houses who have worked so hard to show international producers what they can do. "They're our strongest collateral," she says.

"Ironically, it's cheaper to film here than in a long time," says Kelt. "Deals can be done. We're talking about budgets significantly less than a year ago. But people will cut their costs because it's better to do stuff at a small margin than not at all." But it will take a cut-and-dried resolution to end the pain, and everyone's going to be watching this space for a while yet.